July Update from The Vice Chair


While the Fed’s 75 basis point raise in June was the largest since 1994 and a jolt to some, it was not a big surprise to the members of the BOM, who had discussed its possibility. The BOM members also know that another rate increase of this size is possible, even likely to be announced in the 2-day Federal Reserve meeting at the end of this month. The Fed’s efforts to bring inflation back into a more reasonable rate (2% per annum is the usual goal), to engineer a ‘soft landing’ is dependent on a number of factors in a global economy.  

While the decline in the equity market in the first half of 2022 has been unpleasant, at least one bright spot has been the drift to historical norms for the bond market. Additionally, with the rate increases, bonds are yielding more than they did at the beginning of 2022; the payout per share has increased considerably, and bonds are beginning to return to their traditional function in a portfolio as shock absorbers – or ‘ballast’ as one BOM member puts it. That ballast has begun to bring the vessel back into a more normal motion. Additionally, those who have held more cash – the EEF is one, holding almost 5% cash rather than its more usual 1% – cash is earning more. It’s not a long-term strategy, but it does help to soften the current swings and ensures the EEF has reserves available both for payout and reinvestment.

The current nearly daily volatility can be unnerving to those who listen to the six o’ clock news (or the equivalent), but while it’s been quite a while since we’ve seen these kinds of daily moves, for those who have historical perspective, it’s not without precedent. And it’s comforting to know as long-term investors that while we never know exactly how long the storm will last, after the storm, comes the calm and the sunlight. We just have to judiciously ride it out.

To protect ourselves from the volatility of short-term swings in the market we have adopted two critical portfolio techniques. The first is that we base our payout recommendations to the three-year average value of our portfolios and thus avoid some of the pain associated with rapid and sometimes deep price declines.  While the value of portfolios may experience a sharp decline, the monthly payouts are much more stable.

We know that volatility will continue to exist in portfolio management. To protect ourselves from the euphoria or depression of short-term results, we focus on our returns over rolling three and five-year time periods.  Our aspiration is to be in the top third of our competitive universe of balanced mutual funds over most three-year rolling periods.

Since the BOM eliminated outside managers our returns have been in the top third of the competitive universe for 80 of the last 82 measurement periods and for the three years ended June 30. 2022 we were in top 30% with an annual return of 5.48% even with the dismal 18.12% decline for the first half of this year.

Chris Maxwell, Vice Chair

Board of Managers, Easton Episcopal Funds